The use of data and technology will continue to be at the core of oversight by the regulator, according to SEBI Chairperson Madhabi Puri Buch.
The Securities and Exchange Board of India has developed algorithms to detect insider trading and front running, Buch said, during her address at the Foundation Day Lecture at IIM-Bangalore on Friday.
"We actually embedded a QR Code in one of our orders, which took you to a video showing delta trading positions of this individual across scrips. We saw the delta position shoot up just before quarterly results over a period of time. That's the power of visualisation," she said.
I tell my colleagues at SEBI—the analysis is for you. But when you have to convince other people, your best friend is good visualisation.Madhabi Puri Buch, Chairperson, SEBI
Another area where SEBI has successfully relied on algorithms is to detect front-running, she said.
"We're able to detect whether the lapse is happening at the broker end or the mutual fund's end."
The regulator has also made significant progress in the area of inspections. "We had baba-adam type inspections. So, we said, we can't have this in this day and age."
She gives an example pertaining to the mutual fund industry. "...We started to collect data from them—we have about 44 of them. We told them here are the 80 algos (algorithms), explained to them our logic, and told them these algos manifest our laws. Now, we can inspect the industry on a daily basis. We choose to do it on a quarterly basis. They get a report on violations on a particular day, what law was violated, and penalty amount. 100% audit of every data point.”
SEBI is also using technology to check front-running in the mutual fund market, but recently there have been certain setbacks because the regulation has not kept pace with technology, she said. "But we think we'll get there in a few months."
According to her, the tough part is catching misselling.
"There is no formula to catch misselling. If a 89-year-old is being sold a nine-year fixed maturity plan, that's obvious misselling," she said.
We're now engaged in developing algos that'll detect violation of the spirit of the law. And in a few months, hopefully, we'll have something to show for it.Madhabi Puri Buch, Chairperson, SEBI
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